Moving on, Trader Mike still sees the need for a significant pull-back:

The technical picture remains about the same as it’s been for the last week and a half or so. The longer-term overbought indicators are still near extreme levels (T2108 is 88.4) and I still have to believe that the market is due for a pullback. But getting short just because of an overbought condition can be a painful prospect. The bulls are being stubborn and are still buying all the dips.

The ~875 overhead resistance level on the S&P 500 is still in play, barely:

But barely is good enough, for now.

On the fundamental side of things, there's plenty of bad news for this market to ignore.

Barring an agreement, which looked increasingly difficult, Chrysler was expected to seek Chapter 11 protection on Thursday, most likely in New York, these people said....People briefed on the negotiations said that while it seemed certain Chrysler would survive and avoid liquidation, it was not yet clear whether it would have to be placed into bankruptcy to sort through any unresolved issues with creditors.

And second, Bloomberg reports that 6-out-of-19 banks will need additional capital. Apart from Citi and Bank of America, some other banks were singled out as likely to appear in next week's release:

SunTrust Banks Inc., KeyCorp, and Regions Financial Corp. are the banks that are most likely to require more capital, according to an April 24 analysis by Morgan Stanley.

My portfolio is now well prepared for a pummeling by the bulls. I fully expect the bulls to ignore the sound technical and fundamental factors featured in this post, as I continue to confidently lose money in this irrational market.

Call me a glutton for punishment (pigs are known for their gluttony), but I added some more shares of FAZ today at $8.45, bringing down the cost basis of my position to $9.30. My next move regarding FAZ may be to eschew the shares themselves and pick up some FAZ calls, instead. But I'm not there, yet.

Here are a couple of videos of "The First Part." One is from the recent Coachella; the other the original video. This song's riff is one I end up playing if I have a guitar in my hands for more than ten minutes.

27 April 2009

The market actually went down today, and for the most part, stayed down. I guess it took a pig flu pandemic scare, an earthquake, and a low-flying plane over Lower Manhattan to take down the market. Or not. Perhaps it was just a small Monday sell-off in an overheated market.

25 April 2009

Another day, another attempt to make the bearish case, i.e. talking my book, in the face of tremendous bullish headwinds.

Fundamentally, when company insiders are buying up shares hand-over-fist, it's generally a good signal to join in on the buying activity. And when insiders are dumping shares, it's best to dump along with them:

Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.

Gap Inc.’s founding family sold $45 million of shares in the largest U.S. clothing retailer this month, according to Securities and Exchange Commission filings compiled by Bloomberg. Daniel Warmenhoven, the chief executive officer at NetApp Inc., liquidated the most stock of the storage-computer maker in more than six years. Sales by the co-founders of Bed Bath & Beyond Inc. were the highest since at least 2001.

While the Standard & Poor’s 500 Index climbed 26 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.

“They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling,” said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. “Whether it’s a sustainable rebound is still in question. I’d prefer they were buying.”

...

Insiders from New York Stock Exchange-listed companies sold $8.32 worth of stock for every dollar bought in the first three weeks of April, according to Washington Service, which analyzes stock transactions of corporate insiders for more than 500 institutional clients.

That’s the fastest rate of selling since October 2007, when U.S. stocks peaked and the 17-month bear market that wiped out more than half the market value of U.S. companies began. The $42.5 million in insider purchases through April 20 would represent the smallest amount for a full month since July 1992, data going back more than 20 years show. That drop preceded a 2.4 percent slide in the S&P 500 in August 1992.

Then there's this batch of macro-level bad news from David Rosenberg c/o Zero Hedge. Bottom line, Rosenberg says the announced reduction in automotive production, the lack of a bottom in the housing market, and the rise in the unemployment rate to 9%, then to 10% all points to the continued degradation of the U.S. economy.

Looking at some charts, the S&P still climbed this week, yet the ~875 resistance level is still holding, and the MACD is now showing negative momentum:

Looking at the $SPXA50 chart, we're at 11 days-and-counting with more than 400 of the S&P 500 trading above their 50-day moving average. When you're holding leveraged shorts like TZA and FAZ in a market like this, it's fraking annoying. And I know, I recently examined the interminable stretch (for the bulls, at least) when fewer than 100 stocks in the S&P 500 traded above their 50-day moving average for 48 trading days. In that post, I didn't even bother to point out the recent 15-trading-day period in February and March, when again, fewer than 100 S&P 500 stocks traded above their 50-day moving average. Let's just say I have some Obama-esque hope that the markets pull back next week. These bearish-case posts are getting to be a bit tedious, and repetitive.

On yesterday's video, the Chart Pattern Trader saw "bearish sign after bearish sign." He listed major overhead resistance, bearish divergences, trend breaks, bearish indicators and candle patters while summing up his negative position on the markets. Here is his brief rundown:

The reversals are panning out, with the right shoulder of a head and shoulders pattern looming over the S&P 500 chart. I explore more strategies and reversal signals on the charts. I bought all my shares back and added to my positions of SDS, QID, and FAZ. Look for the explosive sell off over the next two sessions. Remember, we will get word on the stress tests of the banks on Friday. Moreover, 25 % of the corporations on the S&P 500 are reporting this week.

For purposes of my portfolio, the Chart Pattern Trader analyzes FAZ starting at 20:25 and continues until 27:15, when he switches over briefly to looking at the chart of SKF, that old-school 2X-short financial ETF. If you're interested in the fate of FAZ, you should watch the video, but bottom line, he sees a likely break above the recent $13.26 peak, and a move significantly higher from that, with a short-term target of $25. I personally can't see holding my shares of FAZ straight through these healthy targets, but these forecasts may convince me to continue trading in and out of just the short side.

As you can see above, returns have generally been positive following other times the indicator has reached extreme levels. On the low end the results are about the same as the long-term market drift. While not shown, periods leading up to 20-days are also all generally positive. As the indicator moves higher the results look even more bullish. But instances are incredibly low, so not much can be extrapolated. I see two points to take away from this exercise: 1) When the market gets extremely overbought that is not necessarily a bad thing, and on its’ own is certainly not a signal to sell short. 2) By this measure the market is now more overbought than it has been in at least 23 years.

And a reader kindly pointed me to Tim Knight's Slope of Hope blog. Knight looks to be targeting ~815 on the S&P, which I find to be quite agreeable with my market outlook. Click on the link not for his simple chart, but also for the 120+ comments/discussion he generated.

The Pig is in short-term trading mode, keeping an eye on the Russell 2000 on behalf of my 3X-Bear R2K ETF, TZA, as well as looking for enticing opportunities to trade the FAS/FAZ combo. Aside from those, I'm interested in keeping abreast of the S&P 500 and its action over the coming weeks.

Bottom Line: Based upon my perception of market behavior versus indicator status, I am expecting some kind of correction, possibly a short consolidation -- a week or so -- or a quick, scary couple of down days. Regardless of how the overbought conditions are cleared, I am assuming that the rally is not over and will persist for at least a few more weeks.

Today qualified as a "quick, scary" down day:

We'll see if the gravitational pull on the market continues tomorrow. A quick look at the $SPXA50 chart below shows that the number of stocks trading above their 50-day moving average dropped from an ionospheric 448 to a mere stratospheric 413:

Zero Hedge offers up some more technical analysis suggesting 816 as a potential downward target for the S&P, which is only a 2% drop from today's close. Again, this is a short-term target (Zero Hedge's linked report calls for ~April 30 as the target date, what with Chrysler's presumed Chapter 7 filing coming around that date). That seems like a conservative target to me, considering today's thorough sell-off.

Trader Mike took note of today's sell-off, pointing out the steep upward trendline has now been broken, meaning the short-term trend for the market is now negative. But it's not yet time for the bears (or a certain Pig) to celebrate and run rampant:

I think we all knew this selloff was coming, the only question was when. This was the biggest drop in several weeks and has broken all the March trendlines on the major indices. The bulls didn’t even put up a fight at those trendlines, which is a big change from the past few weeks. Financials led the way down, thanks to Bank of America (BAC). Despite BAC’s 24% drop today the chart doesn’t look terrible. It’s just back to where it was about a week ago. Let’s see if it can find support around the late March highs.

19 April 2009

89.6% of the S&P 500 is trading above its 50-day moving average. That's 448 out of 500 for the mathematically disinclined.

I seem to be posting updated versions of this chart every few days now, as this market continues to defy gravity and rationality.

Again, I ask the question, will this market rally end soon?

Looking at the S&P 500 chart below, you'll see that some significant overhead resistance, as well as some short-term overbought indicators, could put the brakes on this rally:

Corey Rosenbloom at Afraid to Trade sees a potential bearish rising wedge forming in the S&P 500. Click on the link and check out the post on Afraid to Trade for his annotated chart, but here's the suggested strategy:

The expected play at a minimum is for a retest of the rising trendline around 850, but aggressive traders might want to hold on for a larger target should price weasel its way out of the wedge formation, which would be quite bearish. Should price continue to rally and break outside the wedge, the stop-loss point would be clearly defined.

Since I still believe that this irrational rally is overdue for some subsiding, I picked up shares of FAZ at $8.85.

Fozzie has fallen ~70% over the last month. The chart below shows the underlying index for FAZ, and its red-hot performance during March and April. Yes, I'm bucking the trend here, so I'm ready to sell if some quick-and-dirty profit opportunities come my way.

It is fair to say that just about everyone is bewildered and trying to understand when this rally will end....Normally, when we call for a trend to stop, we need to see three things. First, the trend has to have been strong and dramatic. Second, the trend has to have recently increased its trajectory in a hyperbolic way, to have accelerated its performance. And third, we need to have seen the trend reverse the clear majority of the prior trend.

On all three dimensions, we believe the current market conditions are clear and unambiguous. The current trend is strong and dramatic. We have clearly seen the trend accelerate, with the performance now coming from the tails of the distribution. And, we have reversed far more than the build-up of the prior trend. Think of a rubber band. What we are trying to identify is when the rubber band has been stretched far past its normal state. We believe unambiguously that we are at that point today.

All of this was true a week-and-a-half ago so we felt comfortable then calling for an end to the underperformance in Sentiment and the outperformance in Valuation. Today, we feel even more comfortable. And while on average, it takes 10 to 15 trading days after this condition has been met for the reversal to take hold, so we still have time, we certainly haven’t been proven right yet. As a prior boss repeatedly reminded me, and I humbly note here, there is no difference, though, between being early and being wrong.

Last levels seen during the fiasco after the November crash. Was at 0.08% two days ago. All money is running for near term safety, despite CNBC's urges for tresury investors to jump into equities - well, the opposite is happening...Maybe the real money is seeing something, and is accelerating purchasing of T-bills into this melt up.

Equities: have fun buying stuff.

How about we look at some charts that should make us feel better about questioning the post-nuclear-cockroach-like survival of this rally.

Here is the three-year chart of the $SPXA50 showing 88% of the S&P 500 is currently trading above its 50-day moving average. Breaching 80% is infrequent. 88% is downright rare, and at the very least, hasn't happened in the past three years:

Here is an annotated chart of the put/call ratio. The low 10-day moving average of the put/call ratio suggests the market is far too optimistic. Except the recent low reading from mid-March only slowed down the pace of the current rally--it didn't signify a market turnaround. Harumph.

And here's my current focus, the Russell 2000. I went short far too early, it seems, as the R2K is indeed jamming right up against both the overhead resistance levels established in January and February, and is near the top of its current bull trend channel.

This market looks so ripe that it's overdue for a bit of rot to form. Maybe I'll keep all of this negative evidence in mind tomorrow, and day-trade some under-$10 FAZ. I mean, what could happen? The market rises another 2% on more bad news?

13 April 2009

The Russell 2000 Index’s record one-month gain is sending danger signals to investors who remember how similar rallies in U.S. stocks came to an end.

The gauge of companies with a median value of $301 million is beating the Standard & Poor’s 500 Index, where stocks have an average market value of $6.5 billion, by 9.8 percentage points. Gains in the Russell 2000 are being led by an 11-fold jump in Spansion Inc., a bankrupt chipmaker, and a sevenfold rise for Hayes Lemmerz International Inc., a wheel manufacturer that hasn’t had a profit since 2006.

While small-caps tend to lead the way out of bear markets, when they have outpaced larger stocks by this much, both indexes erased gains and fell, according to data compiled by Birinyi Associates Inc. Increased trading and ratios of advancing to falling stocks have also risen to levels that preceded declines, boosting investor concerns that the S&P 500’s 27 percent advance since March 9 will end the same way as the 24 percent rally that fizzled in January.

“This move is too explosive to be sustainable,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $60 billion. “None of the structural underpinnings of the market have really changed. It’s going to be a multiyear healing process.”

...

Steeper jumps for small-cap stocks one month into a rally are signs of indiscriminate buying and usually come before equities fall, said Cleve Rueckert, a Birinyi analyst. The Russell 2000’s 36 percent climb since March 9 is its steepest since the index began in 1979, according to Bloomberg data.

...

“It’s unusual for a new cycle to start with such an abrupt gain,” Rueckert said. “Bear market rallies are broad. Everything goes up really sharp, really fast and not necessarily for a particular reason.”

None of the bull markets tracked by Birinyi included small- caps outperforming after a month by the rate they are now. On average, smaller stocks are tied with the S&P 500 at this stage of a lasting recovery, the data show.

10 April 2009

M.I.T. professor Simon Johnson leads off the debate with this worrying thesis:

Some stock market rallies are reassuring. Others provide at least temporary respite. And a third kind, more commonly seen in emerging markets, actually expose deeper underlying problems and contribute to a further downturn.

We seem to be experiencing this third kind of rally in the U.S. right now. Equity prices are up sharply, but the debt market continues to indicate a high probability of default. In particular, the level and recent trajectory of credit default swap spreads suggest that, as the financial system as a whole stabilizes, market participants expect increasing odds of failure (and failed bailout attempts) for the very largest banks.

Stanford professor Nicholas Bloom follows up, arguing that while the global economy is still uncertain about future growth, it is far less uncertain than it was in the Autumn:

Fortunately, the G-20 leaders have agreed to maintain free markets as well as sensible increases in financial regulation — which is radical, unprecedented stuff. As a result stock market uncertainty – measured by implied volatility, commonly known as the “financial fear factor” - has fallen. A measure of uncertainty (tracking implied volatility of the S & P 500) shows a more than three fold jump after the collapse of Lehman in September 2008. But that measure has fallen back by 50 percent as political uncertainty has receded.

Of course, there is still tremendous uncertainty about the extent of the damage to economy. We still don’t know the value of the toxic assets central to the banking crisis. Fear remains a factor, leading firms to postpone investment and hiring decisions. But we are moving past the big spike in uncertainty of last fall. And if uncertainty continues to decline, growth should start to rebound.

Barry Ritholtz looks at the bigger investing picture, and warns against both buy-and-hold, and more importantly, hunting for bottoms:

[I]f you managed to catch the exact low in December 1974, well, then, you would have had to accept an enormous level of volatility. That low was followed by a 75 percent rally, a 27 percent sell off, a 38 percent rally and a 24 percent sell off. But those are nominal numbers. Adjust the returns for inflation, and you actually lost about 75 percent of your money in real terms.

Investors turned optimistic for the third time since the credit crisis started last year, gauges of sentiment among individual investors in the U.S. show, a pattern that Helmsman Global Trading says is a signal to sell.

The difference between the American Association of Individual Investors Bull Index and Bear Index surged to 5.6 as of April 2. When the reading rose to 11.5 in November and 13.6 in January it coincided with the end of “bear-market rallies” of at least 21 percent by the MSCI World Index.“What that’s going to show is that people always want to look at the glass as if it is half full,” said Martin Marnick, head of trading at Helmsman Global Trading Ltd. in Hong Kong. “Using common sense you know what that general trend is. We’re in a recession and this is not the start of a bull market.”

The spread, which has fluctuated between 63 and minus 54 in the past two decades, has climbed above 5 in only three periods since the collapse of Lehman Brothers Holdings Inc. in September. It retreated to minus 8.6 according to data released yesterday.

I have annotated three charts analyzing what the number of S&P 500 stocks trading above their 50-day moving average can predict about what's to come in the stock market.

Please click on the images to make them large and more legible.

And if you want to keep check on this chart, the symbol is $SPXA50 at stockcharts.com.

These charts tell me that odds are, the recent bear market rally is just that, a violent spike off of the lows. And we're going to see the market pull back in the near term.

The only data point calling that prediction into question is the $SPXA50 data from last October and November, when the number of S&P 500 stocks trading above their 50DMA remained at extremely LOW levels for ~six weeks without much of rebound.

Will the Dow sell off next week? The Fibonacci retracement suggests that the Dow should pull back from today's close, but I have no idea, and I'm more interested in what the Russell 2000 is doing, since that's where my money is.

I worked up a chart of the Russell 2000, for comparison's sake, since I'm currently holding shares of TZA that took quite a shellacking today.

Click on the above chart to make it, and my comments, larger. The ~472 level on the R2K is where I'll be paying attention when trading resumes on Monday. Why? Because it's still the overhead resistance level from earlier this year, and to a lesser extent, 472 represents the 61.8% retracement from the early-November high.

Investing gets much dicier as we nudge ever so closer to the well-watched resistance level of 875 on the S&P 500 - maybe the market pushes to 900 just to salt the wounds of bears. T2108, the percentage of stocks trading above their 40-day moving average hit 83% on Thursday. The last two times this happened, we got a top the first week of January, 2009, and the all-time top in October, 2007. Recall that since 1986, selling the S&P 500 when T2108 crossed the 70% threshold, above or back below, has provided a practical capital preservation strategy. This means that we are in over-bought territory. The risk/reward is now very poor for playing chicken with the S&P 500's next resistance level. This next push represents just another 5% of performance. Not a good spot for initiating new longs, and a great spot for selling shorter-term holdings into the rally.

03 April 2009

Added to my 3X-short Russell 2000 position at the close, picking up additional shares of TZA at $39.875, bringing down the cost basis of my position to $40.53.

I prematurely sold off 40% of my FAS holdings at $6.61, from a cost basis of $5.79, for a gain of 14.2%. Considering FAS closed today at $7.20, I left cash on the table, but I'm still pleased that my remaining FAS position did so well on such a relatively quiet market Friday.

01 April 2009

However, a closer look at leveraged ETFs warns that in the longer run, leveraged ETFs may not provide long-term investors with the kind of returns their 2-to-1 or 3-to-1 banners suggest. Between fees and the unique way that leveraged ETFs are structured, investors who rely on leveraged ETFs may end up getting significantly less than 2-to-1 or 3-to-1 on their leveraged ETF investments. And although this does not mean that investors and position traders cannot use leveraged ETFs to good effect, it does mean that investors looking to leveraged ETFs should in some ways temper their expectations and, if not “do the math” first, at least be sure they read the fine print.

For short-term traders of ETFs, though, many of the problems that leveraged ETFs bring to investors are not problems at all. Because of the relatively short holding period of five to eight days, short-term ETF traders have a far better opportunity to reap the benefits of 2-to-1 or 3-to-1 leverage without many of the drawbacks that longer-term ETF investors must face....What does this mean for traders? Not as much as the financial press will lead you to believe. Traders are in positions only a few days and when they trade these ETFs, they are not hurt much (if at all) by the rebalancing costs. Hold these ETFs for many weeks and months, and returns will potentially underperform. But trade them for a few days as TradingMarkets does, and a trader will be fine. A look at a classic, short-term trading strategy using ETFs shows how it applies to the world of leveraged ETFs.

Penn continues by advocating the two-period RSI swing trading strategy that I often use and describe on this blog.

Go me.

Otherwise, the moral of the story is, if you want long-term long or short exposure to indices or sectors, stick to buying and holding straight-up unleveraged ETFs. But if you are looking to juice your returns in the short-term, the leveraged ETFs are the preferred vehicle.

The financials were bid up over the last two trading days, much to the chagrin of my FAZ position. I unloaded the remaining shares of FAZ at $20.075, from a cost basis of $29.52, for a loss of 32%. That's what I get for getting cute and trying to swing trade flat-footed against the trend.

With the sale of my FAZ shares, I swung over some of the proceeds into FAS, buying shares at $5.745 and $5.85, for a cost basis of $5.79.

A key lawmaker on Tuesday said he would support allowing banks in some circumstances to recoup losses they have already taken due to controversial mark-to-market accounting rules. House Financial Services Committee Chairman Barney Frank, D-Mass., said he would support a procedure for firms to make the case that they have been forced to take losses on assets that they are holding to maturity. Mark-to-market rules are an accounting methodology that requires banks and other corporations to assign a value to an asset, such as mortgage securities, credit-card debt or student-loan investments, based on the current market price for either the security or a similar asset. Frank said he would talk to the Securities and Exchange Commission about a rule change.

After trading down in the morning, the major financials are all solidly in the black today. Supposedly, there's enthusiasm over tomorrow's likely relaxation of mark-to-market rules.

Citigroup (C) is up over 5% and Bank of America (BAC) is up over 3%.

One trader we talked to thinks this is a classic buy-the-rumor-sell-the-news kind of deal. You've got retail investors who think a major change is coming, but after it's over, investors will realize there's no there there.

For weeks, investors have been expecting regulators to change accounting rules that would allow banks to recoup some losses already taken on illiquid mortgage assets, making Thursday's official decision by the Financial Accounting Standards Board almost a nonevent, analysts said.

But those high expectations are setting the market up for a big disappointment if rule makers actually balk at making changes.

"There might be a little bit of a positive reaction, but the move in stocks has already taken place as regulators already said they were considering changing the rule back in early March," said Fred Dickson, chief market strategist at D.A. Davidson & Co.But "in the event they recommend no changes, we could see a sell-off," Dickson said.

Markets and music.
They go together like chocolate and peanut butter, right? But with alliteration.
Then there's the old trope: "Bulls make money. Bears make money. Pigs get slaughtered."
This bloggy beast is my forum to post investment ideas to avoid the stock market from becoming a slaughterhouse. And to impose my meandering musical preferences on unsuspecting readers.
Step up to the trough and enjoy the slop.

Poke the Pig

If you want to contact me, make a comment on any post, or just send an e-mail to wershovenistpig at gmail.com.